Recurring Nightmare: How To Compensate Your Sales Force In A Services-Based World

GreenPages Technology Solutions has been at the vanguard of solution providers expanding into cloud computing and managed services. While there have been technological hurdles associated with that transition, one of the biggest challenges has been creating a services-based sales culture -- and that includes finding the best way to pay the GreenPages sales force.

"We're trying to transform the sales incentives to [make them] relevant in this new era," said GreenPages CEO Ron Dupler. While the Kittery, Maine-based company has implemented a sales compensation plan that maps more closely to a recurring revenue business model, Dupler acknowledges the effort remains a work in progress.

"By no means do we think we've got this completely figured out," he said.

Few solution providers have. As they embrace cloud computing and managed services, solution providers must adapt to the recurring revenue streams that come with a services-based business model. And that means devising a new compensation plan for a sales force accustomed to getting paid commissions for selling products and one-time implementation projects.

"Traditional compensation plans don't work. Sales behavior and sales compensation are big issues for [solution providers] right now," said Kristin Rogers, a former solution provider executive who now provides channel consulting services.

Given that a company's revenue stream is its lifeblood, how solution providers resolve these issues will affect many other aspects of the business.

"Companies drive their strategic objectives via sales compensation," said John Convery, a 30-year channel veteran and former executive at Denali Advanced Integration, now president and CEO of Seattle-based John Convery Consulting.

Getting sales compensation right is also critical to hiring top-notch salespeople. "You're not going to be able to compete without a compensation plan that allows you to attract and retain top sales talent," Dupler said.

Problem is, the channel is still struggling with questions about what works and what doesn't. Should sales representatives receive a one-time commission when they sign a customer to a services contract? Or should they be paid monthly, quarterly or annually? Should they get rewarded for renewals? And should commissions be based on revenue, gross profit or some other metric?

SHOW THEM THE MONEY?

"We're wrestling with it," said Dan Bivona, sales director at Vormittag Associates Inc. (VAI), a software developer and IBM channel partner, of recurring revenue compensation. The Ronkonkoma, N.Y.-based solution provider traditionally has sold on-premise turnkey systems, along with its own applications and custom software development services. But earlier this year the company began offering Platform-as-a-Service and Software-as-a-Service deployment options for its products.

The question for VAI is how to compensate its sales force for the new services. The company is considering paying sales representatives a percentage of monthly income from contracted services, Bivona said, or some kind of up-front commission equal to two or three months of subscription fees.

"When a sales rep closes a deal, he wants his money," Bivona said. That was easy when customers paid their bill as soon as a deal was concluded. But with PaaS and SaaS services, "the money's not there yet."

Key decisions come down to how often a company pays its sales representatives for selling services and what that compensation is based on.

Rogers worked at a couple of channel companies that took different approaches. One paid its sales representatives a commission up front based on the full-year value of a services contract. While sales reps liked that deal for obvious reasons, Rogers said it reduced their incentive for staying engaged with a customer through the life of the contract. The other approach paid sales representatives a percentage of monthly billings -- an approach that provided regular, but smaller commissions.

GreenPages pays its sales force a combination of commissions and base salary. Commissions are based on quarterly billings, Dupler said, following the accounting principle of revenue recognition: Sales reps get paid when the company does.

Dupler declined to disclose the split between base salary and commissions, or the commission percentages. He added that cash flow isn't an issue for GreenPages.

Paying up-front commissions can be problematic for smaller solution providers with tight cash flows, however.

Another question is whether to base commissions on a percentage of service revenue (gross sales), on a deal's gross profit, or some combination of the two.

Power Consulting Group, New York, is seeing its managed services business explode. Ronnie Parisella, business development director, favors basing sales commissions on gross sales. "Just pay a lower percentage off the top. It's a hell of a lot easier," he said in an interview. That practice avoids confrontations with sales representatives who, when paid based on gross profit, want to know how a service's profitability is calculated.

GreenPages bases its commissions on a formula that's more weighted toward revenue, according to Dupler.

Cloud services vendor IndependenceIT sells its services, including the Cloud Workspace platform and Desktop-as-a-Service, through solution providers. Many of IndependenceIT's partners are new to the recurring revenue model, so the company has been offering training for partners through its "iIT University" to help them make the transition.

Paying a one-time commission equal to a percentage of the first month's revenue from a services contract -- as much as 50 percent -- is the way to go, said Jim Lippie, until recently the executive vice president of business development at IndependenceIT and now CEO of the cloud computing company. "I certainly advocate for simplicity. Look at that first month, pay [a commission], and move on," he said.

Atlantic, Tomorrow's Office, a New York-based solution provider that partners with IndependenceIT, follows the vendor's advice. While Atlantic, Tomorrow's Office pays sales commissions based on gross profit for hardware sales and on-premise installation, commissions for cloud and MSP services are based on a percentage of the monthly recurring revenue -- paid up front, said Bill McLaughlin, CTO of Atlantic, Tomorrow's Office.

KEEPING THE CUSTOMER ENGAGED

One potential problem with paying sales commissions in an up-front lump sum is that sales representatives could fail to maintain ongoing engagement with customers.

Keeping the sales force engaged with customers is a goal at New Signature, a Washington D.C.-based solution provider that partners with Microsoft and offers consulting, migration and support services around Microsoft's cloud software, including Office 365.

The company pays its sales force commissions based on a percentage of the revenue generated by service contracts, said David Geevaratne, New Signature president and co-founder. But it also offers "accelerators," higher percentage commissions for sales reps who exceed their quota, calculated based on the trailing year's sales. That encourages sales reps to go beyond selling the one-off project.

New Signature's sales representatives "are incented to constantly re-engage with our customers to maintain a continuing relationship and make them aware of how our other offerings can help them," Geevaratne said in an interview.

IndependenceIT's Lippie is also in favor of offering incentives to encourage sales reps to identify new opportunities with customers. And he said the company provides enough of a base salary to keep the sales force comfortable, "but not too comfortable."

GreenPages also offers commission accelerators that pay sales representatives more for selling cloud services and other offerings "that are the most strategically important to us," Dupler said.

Convery argues that if a solution provider benefits from the lifetime value of a relationship with a customer, sales representatives should be rewarded accordingly. Sales reps should get some kind of residual for service contract renewals, for example, and maybe added incentives to get customers to sign up for training and certification services, he said.

"Instead of a unit price, it's the lifetime value of the deal," he said. "The challenge for the progressive channel partner is, how do you keep your sales team motivated?"

But don't let incentives become an annuity for sales reps, warns Gary Pica, president of TruMethods, a consulting firm that helps solution providers transition to managed services. "They start to make their money on sales they've already closed. You want them to make money on new sales," he said.

Pica advocates a one-time, up-front commission equal to a customer's first monthly payment and then leaving the customer engagement work to the technical and support teams.

Rogers said a strategy that worked at one solution provider was hiring a services-savvy sales rep specifically to generate demand for cloud and managed services. That rep was paid a different mix of salary and commissions, but the regular sales force continued to "own" the customer relationship and also won commissions for deals. While she admits that essentially meant the solution provider paid commissions twice for sales, it eased anxiety in the sales department and helped ramp up cloud/MSP sales more quickly.

Sometimes solution providers will just add managed services to the portfolio of products being sold by their existing sales force. "I've seen very little success with that approach," said Pica. He recommends taking an existing sales rep or hiring a new one and dedicating that person to selling services. "One person can generate a lot of revenue," he said, noting that the cost-of-sales is low.

GreenPages employs sales specialists to help sell cloud management and other services, and they are paid commissions with a different mix of base pay and variable commissions. But they are "very much aligned with the sales compensation model," Dupler said.

The sales compensation dilemma is even more complex when a solution provider is transitioning to an all-services model or taking a hybrid approach that combines old and new business models. That can mean maintaining two sales compensation plans, temporarily or permanently, for one sales force.

Some solution providers have resolved that dilemma by creating separate sales forces with separate compensation plans: one for traditional IT product and project sales, and one for cloud and managed services.

But Convery warns having separate sales forces can lead to administrative headaches and the possibility of two sets of sales teams calling on customers, creating complexity for the solution provider and confusion for the client.

And Rogers cautioned against introducing new sales compensation plans that are too complicated, implementing them too quickly or making frequent changes to plans once they are adopted. Such moves can sow dissatisfaction among sales representatives.

"The clearer, the crisper [the compensation plans] are, the more effective they will be in driving behavior," she said.

PUBLISHED AUG. 12, 2013